Do balanced-budget fiscal stimuli of investment increase its economic value?

Dosi Cesare (), Michele Moretto and Roberto Tamborini
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Dosi Cesare: Department of Economics and Management, University of Padova, via del Santo 33, Padova, Italy

German Economic Review, 2022, vol. 23, issue 2, 157-179

Abstract: We examine the timing of a business investment providing valuable external benefits to society. A surge in uncertainty about private returns, a typical feature if not a cause of recessions, delays capital outlays to an extent that may be detrimental to social welfare. Is there an efficiency-improving public policy directed at accelerating investment? By real option analysis, we try answering this question by comparing three fiscal policies: (i) a simple subsidy on investment, (ii) a balanced-budget fiscal stimulus where the subsidy is subsequently covered by profit taxation, and (iii) by taxing external benefits as well. We show that, under a balanced-budget stimulus, investment acceleration may come at the expense of a net economic loss, and the higher is uncertainty on private returns, the higher the likehood of a negative outcome. However, this risk strongly declines when government spending is balanced by taxing both private and public returns on investment.

Keywords: investment; Fiscal stimulus; balanced-budget constraints; Real options (search for similar items in EconPapers)
JEL-codes: D92 E62 E63 G31 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1515/ger-2020-0059

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